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176Background

A surprisingly small number of new ventures and innovative small- and mediumsized enterprises (SMEs) account for a large share of net job creation and productivity growth in the economy (Henrekson & Johansson, 2010). However, due to a lack of financial resources or competitive positions, many SMEs are not able to survive their first years of operations (Nightingale & Coad, 2014; Shane, 2009). As a consequence, targeted R&D grant programs were created as part of industrial policy for most governments in Europe (Becker, 2015). The main goal of these R&D grant programs is to alleviate financial and market pressures while R&D efforts are brought to fruition, thereby increasing the likelihood that these firms fulfill their growth potential. Job growth tends to be one of the most important reasons why policymakers launch R&D grants toward growth-oriented SMEs, and it is widely regarded as a proxy for the social returns of such government support programs (Cantner & Kösters, 2015). Additional R&D activity is considered to best be captured by an increase in number of employees (Cantner & Kösters, 2015; Wallsten, 2000). A recent literature overview by Dvouletý et al. (2021) indicates that R&D grants toward SMEs in the European Union have been successful in promoting employment growth. However, these authors report significant differences depending on the length of the post-support period, firm size, region, industry, and size of the grant. This implies that we still need more knowledge about the effectiveness of such targeted R&D grant programs, and about whether they are effective in influencing the demand for labor among growth-oriented SMEs (Edler et al., 2013).

Another aim of R&D grants for growth-oriented SMEs is to spur innovative activities, which suggests that such targeted R&D grants should influence firms’ demand for high human capital employees (see e.g., Wolff & Reinthaler, 2008). As noted by Himmelberg and Petersen (1994), R&D expenditures in small firms are generally spent on the salaries of scientists and engineers, or others with the human capital to drive innovation forward. However, as far as we know, few studies have investigated if R&D grants toward growth-oriented SMEs increase the share of highly educated employees among these firms.

We believe that this knowledge gap is based on data-, measurement-, and selection problems. Because selective grants are designed to target specific firms, any observed effects on the outcome of the targeted firms can equally well be a result of the selection process, rather than the effectiveness of the grant. In other words, if the selection of the grant recipients is based on known qualities or the potential of the firm, it is hard to objectively compare them to firms that did not receive a grant. Matching methods are typically used to overcome such selection issues, but they require longitudinal data on both treated (i.e., those firms that receive grants) and non-treated (i.e., those firms that do not receive grants) firms that enable scholars to construct appropriate comparison groups. Such longitudinal data on targeted R&D grants have until recently not been available.